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Changes to the False Marking Statute Should Reduce the Number of New Suits Filed

Wednesday, September 21, 2011

Naresh Sritharan | Bloomberg Law Following recent patent reform,1 several aspects of U.S. patent prosecution and litigation have been significantly altered. One change that immediately impacts patent litigation concerns the false marking statute.2 The amendments to the Patent Act should drastically curtail the number of new false marking suits filed. Now is an appropriate time to review the recent history of the false marking statute and consider the impact of the new legislation.

Background of the False Marking Statute

The Patent Act provides that "no damages shall be recovered by the patentee in any action for infringement, except on proof that the infringer was notified of the infringement and continued to infringe thereafter."3 To meet this burden, patentees mark their products with corresponding patent numbers to provide constructive notice to potential infringers. Under Section 292, however, "whoever marks upon, or affixes to, or uses in advertising in connection with any unpatented article, the word 'patent' or any word or number importing that the same is patented, for the purpose of deceiving the public . . . shall be fined not more than $500 per offense."4 Furthermore, the statute provides that "any person may sue for the penalty, in which event one-half shall go to the person suing and the other to the use of the United States."5 Although the false marking statute has remained the same for nearly 60 years, recent court decisions interpreting the statute have spurred an increase in false marking litigation in the last few years.

Fine for False Marking Applied per Mismarked Article

In late 2009, the U.S. Court of Appeals for the Federal Circuit concluded that Section 292 authorized the maximum fine of $500 per each article marked with false patent information.6 The Federal Circuit's interpretation of the statute was notably different than prior district courts that had applied a single fine per "decision" to mark, regardless of the number of falsely marked articles. Forest Group, Inc. sued Bon Tool Co., alleging infringement of Forest's patent7 for spring-loaded leg stilts with a "resiliently lined yoke." Bon Tool counterclaimed for false marking, claiming that Forest had incorrectly marked certain stilts that lacked a "resiliently lined yoke" with the asserted patent. Noting that the "plain language of the [false marking] statute does not support the district court's penalty of $500 for a decision to mark multiple articles,"8 the Federal Circuit found that "the statute prohibits false marking of 'any unpatented article,' and it imposes a fine for 'every such offense.'"9 The court rejected Forest Group's reliance on London v. Everett H. Dunbar Corp.,10 noting that the false marking statute at issue in London was amended by Congress in 1952, thus changing the underlying policy support for that decision. The Federal Circuit also noted with disapproval the approach of other district courts that applied fines for false marking on a periodic basis, regardless of the number of articles produced during that period. Observing that the false marking statute is intended to prevent acts that deter innovation and stifle competition, the court found that these injuries occur each time an article is falsely marked, and "the more articles that are falsely marked the greater the chance that competitors will see the falsely marked article and be deterred from competing."11 The court also noted that a maximum $500 fine per marking decision is insufficient to deter patterns of false marking that "could span years and countless articles."12 The Federal Circuit was unalarmed by Forest's argument that fines on a per article basis "would encourage a 'new cottage industry' of false marking litigation by plaintiffs who have not suffered any direct harm."13 The court determined that Congress had explicitly encouraged individuals to help control false marking by permitting qui tam actions on behalf of the government. Therefore, according to the court, public policy mandated fines on per mismarked article because "it seems unlikely that any qui tam plaintiffs would incur the enormous expense of patent litigation in order to split a $500 fine with the government."14 Finally, the Federal Circuit noted that the statute allowed the award of fines less than $500 and that this range of penalties allowed district courts to "strike a balance between encouraging enforcement of an important public policy and imposing disproportionately large penalties for small, inexpensive items produced in large quantities."15

Burden to Establish Intent to Deceive Clarified

Following the Forest Group decision, 123 new complaints alleging false marking were filed in February and March 2010, compared to only six filed the previous two months. Indeed, certain non-practicing entities were formed with the sole purpose of filing these suits. One such entity, a patent attorney named Matthew Pequignot, filed the next false marking suit to be considered by the Federal Circuit. In Pequignot v. Solo Cup Co.,16 the plaintiff alleged that Solo Cup had continued to mark disposable tableware with two patent numbers17 that had expired. Pequignot sought penalty of $500 per falsely marked article, an amount equaling over $10 trillion in damages. The Federal Circuit agreed that knowingly marking products with expired patents creates a presumption of intent to deceive the public, but found that the presumption was rebuttable. Initially, the court noted that because the false marking statute is a criminal one, intent to deceive must be shown by a preponderance of the evidence. To establish its good faith in marking, Solo Cup presented evidence that it had relied on the advice of counsel in acting to reduce costs and had later discontinued manufacturing molds with the expired patent numbers. The Federal Circuit agreed that Solo Cup lacked the requisite intent, clarifying that liability for false marking requires a "purpose of deceit, rather than simply knowledge that a statement is false."18

False Marking Plaintiff Had Standing to Assert Claim Based on Government's Interest in Compliance with the Statute

Although Pequignot appeared to increase the burden to establish intent to deceive the public through false marking, new complaints alleging violation of Section 292 continued to flood the district courts. For their part, defendants to these suits often countered that plaintiffs lacked standing to maintain these actions. In Stauffer v. Brooks Brothers, Inc.,19 Raymond Stauffer alleged that Brooks Brothers sold bow ties falsely marked with reference to expired patents.20 The defendant argued that Stauffer failed to allege sufficient interest to create standing, and the district court agreed, finding that because Stauffer was pursuing a claim on behalf of the United States, the necessary injury-in-fact must be suffered by the government. The United States moved to intervene, citing its interest in the enforcement of the nation's patent laws, but the district court denied the motion. Stauffer and the United States appealed to the Federal Circuit. On appeal, the Federal Circuit found that Stauffer, as a qui tam plaintiff, possessed standing because he was authorized by the government to pursue the action on its behalf. Thus, "because the government would have standing to enforce its own law, Stauffer, as the government's assignee, also has standing to enforce Section 292."21 The court concluded that Stauffer was not required to allege any personal injury and further noted that standing existed regardless of whether the government's interest in Section 292 was "sovereign" (relating to the government's interest in compliance with its own laws) or "proprietary" (relating to a pecuniary interest on the government treasury.

Constitutionality of False Marking Statute Questioned

In 2010, roughly 20 percent of all new patent suits were false marking actions.22 The Federal Circuit's decisions had clearly emboldened private individuals to pursue these claims in exchange for potential millions of dollars in damages. In 2011, however, one district court called into question the constitutionality of Section 292, threatening to cut short the spree of new false marking litigation. In Unique Product Solutions Ltd. v. Hy-Grade Valve, Inc.,23 the U.S. District Court for the Northern District of Ohio granted the defendant's motion to dismiss a false marking complaint, finding that the qui tam provision of Section 292 was unconstitutional under the Take Care Clause of the United States Constitution, which provides that the President "shall take care that the Laws be fully executed."24 Unique Product alleged that Hy-Grade violated the false marking statute by marking certain industrial valve products with an expired patent number25 and using the patent in advertising. Although the Sixth Circuit had previously held the qui tam provision of the False Claim Act ("FCA") constitutional under the Take Care Clause, the district court distinguished the false marking act from the FCA, noting that the FCA enabled the government to maintain control over the action. Furthermore, the district court rejected a ruling by the Eastern District of Virginia,26 which found that the constitutionality of the false marking act was supported by the long history of qui tam actions and the government's ability to intervene in these cases.27 Noting that "history alone is an insufficient justification,"28 the Northern District of Ohio disagreed that the government could intervene in a false marking action under civil Rule 24, particularly in view of the Federal Circuit's characterization of the false marking act as criminal, not civil.29 The court also determined that Rule 24 provided insufficient notice to the public that a false marking action had been filed and that the government could potentially be bound by a settlement between the parties without even being aware of the suit. The district court concluded that Section 292 lacked sufficient statutory controls, finding that the "False Marking statute essentially represents a wholesale delegation of criminal law enforcement to private entities with no control exercised by the Department of Justice."30 The court remarked that government attorneys having no financial stake in the outcome, rather than private parties motivated by monetary gain, should have control over the decisions to bring and settle false marking claims. The district court subsequently granted the government's motion to intervene in the case and ultimately reaffirmed its motion to dismiss the case based on the unconstitutionality of the qui tam provision of the statute.31 Since the Unique Product ruling, at least one other district court has found the false marking statute unconstitutional for similar reasons.32

Heightened Pleading Standard Applies to False Marking Claims

Around the same time that the Northern District of Ohio was deciding Unique Product, the Federal Circuit dismissed a false marking complaint,33 finding that a heightened pleading standard applied to these claims.34 Based upon "information and belief," Thomas Simonian asserted that BP Lubricants had marked certain motor oil bottles with an expired design patent. Simonian alleged that BP "knew or should have known" that its patent was expired and mismarked its products for the purpose of deceiving the public and its competitors. The Federal Circuit concluded that Rule 9(b) applied to false marking claims, requiring a plaintiff to plead with particularity the circumstances concerning fraud or mistake. Notably, the court found that the "gatekeeping function" of Rule 9(b) is necessary to ensure that only viable Section 292 claims that are more than merely speculative reach discovery and adjudication.35 Applying the rule to the instant complaint, the Federal Circuit concluded that Simonian's general allegations were insufficient in the absence of specific underlying facts from which the requisite intent could be inferred. The court noted that facts supporting an inference of intent could be established through the initiation of an infringement suit after the patent had expired or multiple revisions of the marking after expiration. Unsurprisingly, the number of new false marking suits has receded in the months following BP Lubricants as plaintiffs now struggle to allege facts sufficient to meet the new heightened pleading standard.

The Future of False Marking, Post-Patent Reform

Following the passage of patent reform, new false marking suits should rapidly decline. The new law imposes heightened standing requirements on those seeking to bring false marking claims. For instance, new Section 292(a) provides that "only the United States may sue for the penalty authorized by this subsection." Parties that have suffered no actual injury are now precluded from bringing false marking suits because new section 292(b) permits private suits only to "a person who has suffered a competitive injury." The new law also limits the scope of recovery for a false marking claim to "damages adequate to compensate for the injury." Section 292 was further amended to excuse the marking of a product with an expired patent that once covered the product. Finally, the new law allows parties to "virtually mark" a product by directing consumers to a website showing the patents covering the product. These wholesale changes were likely justified in light of the recent abuse of the false marking statute following Forest Group. The final interpretation of the statute, however, will fall to the courts, and it will be interesting to see how future decisions impact the application of new Section 292. Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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